Whither China?

July 16th, 2013

For some time, China has been viewed as a key driver of worldwide economic growth. Many US multinationals have invested considerable sums in China, looking to benefit from the region’s anticipated growth. At the same time, others have questioned the pace of China’s growth due to concerns about the data reported by their government.

More recently, forecasters have been lowering their outlook for China GDP growth. GDP growth for the second quarter is now expected to be around 7.5%, declining further in 2014, potentially to about 7.0%. The threats of a weaker China GDP and the ongoing recession in Europe remain real issues for the US outlook and also have an impact on US policy both monetary and otherwise.

Slower growth in China could also cause a shift in that country’s growth drivers. Investment, which now accounts for nearly half of GDP, will likely slow. Correspondingly, household consumption is likely to become more important. This change, which will take place over several years, should also have an impact on Chinese commodity demand. China’s investment boom has driven demand for copper, iron and steel over the past decade. Demand for these goods should likely cool. However, demand for energy, and, in particular, agricultural commodities should hold up better.

While China is still expected to grow faster than much of the rest of the world, expectations of slower growth means that those companies relying on China may have to look elsewhere to achieve their goals.